Social dumping and EU law: the clash between fundamental rights

The present report will focus on the controversial issue of businesses using cheaper labour force coming from East European countries which joined the EU in 2004. Just before Christmas the Court finally ruled on two long-awaited cases concerning unions’ right to take collective action for the protection of their members’ interests. The Viking (Case C-438/05 The International Transport Workers’ Federation and the Finnih Sramen’s Union v Viking Line ABP of 12 December 2007, not yet reported) and Laval (Case C-341/05 Laval un Partneri Ltd v Svenska Byggnadsarbetareförbundet and others of 18 December 2007, not yet reported) cases were the setting for the clash between unions’ fundamental right to take collective action and the fundamental right of businesses to establish themselves in an EU state (Viking) and to provide cross-border services through the temporary posting of their employees (Laval). The interests at stake were high, which is confirmed by the high number of governments intervening in both cases. Likewise from the day they were handed down, the judgments fuelled an intense debate both within academia and the general public, especially in Scandinavia. The Court attempted in both cases to strike a fair balance between the protection of social standards and businesses’ right to pursue an economic activity.

In the Viking case a Finnish ferry operator intended to “reflag” one of its ferries, Rosella, under Estonian flag in order to recruit its crew there and thereby take advantage of the lower wage costs. The Finnish shipping union intended to prevent such reflagging through collective action such as strike and initiating solidarity actions in Estonia through the transport unions’ international federation. So the case concerned the scope of the right of establishment, and whether unions were entitled to restrict its use in order to protect the interest of their members. The Court thus had to assess whether collective action taken by unions falls within the scope of the right of establishment, and if so whether such action constitutes an unjustified restriction to the right to set up a business pursuant to Article 43 of the Treaty of the European Community (TEC).

The Court first confirmed its case-law according to which this provision does not only concern action and rules emanating from the state, but extends to collective measures originating from private associations. In other words, those associations shall not hinder businesses to set up an economic activity within the EU. Next, the Court considered that the unions’ actions made it less attractive or even pointless for Viking to establish itself in another Member State, since it prevented it from enjoying the same treatment as that enjoyed by undertakings established in that state. Yet, the Court also recognised that the right to take collective action is a fundamental right and highlighted the fact that the EU is not only an economic union, but is also based on social considerations, values, and rights. So a balance had to be found between two conflicting fundamental rights, the right to establish an undertaking and the right to initiate collective action for the protection of workers. The Court did not settle itself this sensitive issue, but left it to the national court to examine whether the union’s action is justified by the legitimate aim of protecting workers and whether it is proportionate to the pursued aim. In this regard, it pointed to the fact that while protecting jobs and conditions of employment falls within the objective of protecting workers, it had to be established that the jobs and employment conditions at issue were actually jeopardised. The Court then added that even if that condition was fulfilled, the national court still had to ensure that the union did not have less restrictive means at its disposal and had exhausted those means before initiating collective action. Finally the Court excluded that collective action could in the case at hand be justified in unions’ general and systematic policy of combating flags of convenience.

So the balance could tilt in favour of the company’s right of establishment to the detriment of the unions’ legitimate interest to combat social dumping. This issue was also at the heart of the Laval case which was decided by the same court a week later. In this case the balance certainly ended to be in favour of the economic freedom.

The Laval case concerned a Latvian undertaking which had agreed to post some of its workers to Sweden to work on a building site operated by a company incorporated under Swedish law for the purpose of the construction of a school in Vaxholm (The Laval case is sometimes referred to as the Vaxholm case). Pursuant to Swedish practice, the Swedish building union asked Laval to enter into negotiations on a collective agreement and thereafter to negotiate wages. Yet Laval refused guaranteeing the requested hourly rate to its posted workers, which was based on statistics on wages for the Stockholm region for professionally-qualified builder and carpenters. Instead Laval signed a collective agreement with the Latvian building sector’s unions, agreeing on wages below what the union required. Upon failure of the negotiations the unions initiated collective actions, such as blockading the construction site and requesting sympathy actions from unions in other sectors. Laval commenced proceedings aiming at declaring the unions’ collective actions illegal and requesting compensation for the loss suffered. The Swedish court was of the opinion that the case raised issues of EU law and asked the European Court of Justice to assess inter alia whether unions’ right to initiate collective action in order to force undertakings to pay a certain level of pay to its posted workers is compatible with businesses’ right to provide services in another EU state than that of establishment.

Pursuant to the EC Treaty and European legislation (see Directive 96/71: the Court based its ruling both on Article 49 TEC and on this Directive. The more technical issue of the directive’s application to a dispute between two private parties and of its relationship with the Treaty provisions is left out from this report.)

a company established in an EU country shall not be hindered to propose services in another EU state and shall for that purpose have the right to post temporarily its employees to the host country. The principle is that such situation is governed by the law of the undertaking’s home country. Yet both provisions as interpreted by the ECJ allow the host country to impose their minimum wages upon the posted workers. The issue here was that in Sweden there is no minimum wage and that wages are set through negotiations between the social partners. The Court had thus to assess whether such system of wage-setting under the threat of industrial action is compatible with the right to provide services across the EU. Like in the Viking case, the Court emphasised that private associations that adopt rules which regulate collectively the provision of services shall comply with Article 49 TEC and shall therefore refrain from restricting the free flow of services within the European Union.

The Court then considered that the exercise of the right to take collective action in order to assess the wages to the posted workers had a restrictive effect because the undertakings might be forced, by way of collective action, into negotiations with the unions of unspecified duration. Thereafter the Court reiterated the discourse on the Community’s social dimension first used in the Viking case. In this respect, the Court emphasised that unions’ collective action aiming at fixing posted workers’ terms and conditions of employment at a certain level falls within the objective of the protection of workers and that Community law certainly does not prevent compliance with minimum pay. Yet, the Court concluded that collective action in the issue at hand cannot be justified in the light of the protection of workers since the national context on negotiations on pay was characterised by a lack of provisions, which are sufficiently precise and accessible and therefore rendered it excessively difficult in practice for an undertaking to determine the obligations with which it has to comply as regards minimum pay. For sure negotiations on pay on a case-by-case basis such as those applicable in Sweden in the construction sector is not compatible with the free provision of services. On the other hand, nothing seems to prevent the imposition of minimum rates of pay by way of collective agreement, but the Court’s ruling seems to imply that such agreement shall pre-exist the provider’s arrival in the host state and shall be non-discriminatory, easily available to and understandable by the service provider.

In both cases the Court shows that it is sensitive to the social purpose and dimension of the Community and explicitly acknowledges that such aims and values can jeopardize the achievement of an internal market based on the free flow of goods, services and people. Yet, in both cases, the balance is likely – or certainly in respect of Laval – to tilt against trade unions. Trade unions can still play an essential role in assessing the salary of their workers, but not through direct negotiations with the foreign provider of services. Likewise Community law does not preclude unions to initiate collective action to defend workers’ interests, but it certainly sets up some important constraints in this respect.